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As Groupon Preps IPO, Google And Startups Grab Merchants

Steve Chen owns 5A5, one of San Francisco’s better steak houses. He’s been contacted by 100 daily-deal companies over the past year to sell happy hour and porterhouse discounts. He thought about going with the leader of the pack, Groupon, but went with a startup called Bloomspot. It provides some things Groupon does not. Bloomspot guarantees a certain check size and gives Chen the ability to target more frequent diners and limit the deal to just Sunday through Thursday nights.

Jonathan Umbel suffered the Groupon experience Chen was trying to avoid. Umbel is the owner of the Tackle Box, a seafood restaurant in Georgetown that bills itself as Washington, D.C.’s “first and only lobster shack.” He lured thousands of customers by offering bargain-priced lobster rolls and fresh oysters on both Groupon and LivingSocial, the other big local-deals player (now backed by Amazon). That goosed his revenue but hurt his margins. He has no hard data to indicate if diners made return visits, which was the whole point, and now he thinks that the steep discounts hurt his brand. Umbel isn’t planning any more deals.

Groupon went from being the fastest-growing, greatest tech startup of 2010 to a deflated bubble with merchant fatigue on the side. It will try again to go public in the coming month, but an IPO that was supposed to yield a $25 billion to $30 billion ­market ­capitalization is now likely to yield $11 billion. That’s still big for a company that didn’t exist four years ago, but concerns about large losses, a run-in with the SEC over disclosure of ­non-GAAP metrics that exclude marketing costs, growing competition and worries about consumer deal fatigue have raised the question about the viability of the local-deal business model.

A comparison of Groupon and other deal sites.

A passel of startups is looking to prove there’s a good business here, just not the way Groupon does it. San Francisco’s Bloomspot can guarantee merchants that, with a ­deal offering $40 for an $80 meal at a restaurant, the average check size will be at least $120. It does this by targeting customers likely to spend larger amounts. Bloomspot also guarantees a certain percentage of customers will return after using a deal, and it takes its commission, typically 40%, only if it meets these numbers. To attract loyal and ­high-quality customers Bloomspot gives customers a credit of 25% of their bill toward their next visit to the merchant. “Consumers only get the best deals if they demonstrate they’re good patrons,” says Jasper Malcolmson, Bloomspot’s CEO.

Womply, a startup cofounded by former LivingSocial general manager and head of sales Brandt Squires, offers a simple proposition for consumers. They can buy deals on Womply.com with any credit or debit card; then they just pay at the merchant using the same card and get a credit sent back to their card. As with Bloomspot, no coupons or phones are required.

“My friends would be giving me sh– for months if I pulled out a Groupon in the middle of a nice dinner,” says Womply cofounder and CEO Toby Scammell. Womply doesn’t send a mass e-mail each day to its members. It only pings customers who have shown a preference for that business. Womply also seeks out longer-term marketing deals, rather than quick ones that bring a crush of customers. “It’s much less of a get-rich-quick idea and more of a sustainable marketing plan over the long run,” says Scammell.

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